2007 (3) TMI 405 - AT - Income Tax

Summary

Issues Involved:
1. Nature of non-competition covenant payment: capital or revenue expenditure.
2. Allowance of non-competition covenant payment: in one year or spread over five years.
3. Disallowance of sundry expenses.
4. Reopening of assessment.
5. Ad hoc disallowance of "Other Expenses."

Detailed Analysis:

1. Nature of Non-Competition Covenant Payment: Capital or Revenue Expenditure
The primary issue was whether the payment of Rs. 38,47,000 for the non-competition covenant should be classified as capital expenditure or revenue expenditure. The assessee argued that this payment was for a period of 5 years to prevent competition from the vendors, Shaw Wallace & Co. Ltd. and Cruickshank & Co. Ltd., within India. The Assessing Officer and the CIT(A) considered this payment as capital expenditure, asserting that it provided an enduring benefit. However, the Tribunal, referencing various judgments, including the Calcutta High Court in CIT v. Avery India Ltd. [1994] 207 ITR 813 and the Supreme Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, held that the non-competition payment was revenue expenditure. The Tribunal emphasized that the benefit was temporary (only for 5 years) and limited to India, and the assessee would still face competition from other entities. Hence, the payment was made to enhance profitability rather than acquiring a capital asset.

2. Allowance of Non-Competition Covenant Payment: In One Year or Spread Over Five Years
The Tribunal addressed whether the entire non-competition covenant payment should be allowed in the assessment year 1997-98 or spread over five years. Given that the benefit of the non-competition agreement extended over five years, the Tribunal decided that the expenditure should be spread over this period. The Tribunal directed the Assessing Officer to allow the expenditure proportionately over five years.

3. Disallowance of Sundry Expenses
For the assessment year 1998-99, the Assessing Officer made an ad hoc disallowance of Rs. 1,25,534 (10% of total sundry expenses) due to the assessee's failure to produce all vouchers. The CIT(A) upheld this disallowance as no details were submitted before him. The Tribunal found no infirmity in the CIT(A)'s order, noting that the assessee did not provide the required details even before the Tribunal.

4. Reopening of Assessment
The assessee raised a ground against the reopening of the assessment for certain years. However, no arguments were presented on this issue. Upon examining the lower authorities' orders, the Tribunal found no infirmity in the reopening of the assessments and upheld the same.

5. Ad Hoc Disallowance of "Other Expenses"
For the assessment years 1998-99 and 1999-2000, the Assessing Officer made an ad hoc disallowance of 5% of the expenses claimed under "Other Expenses" without pointing out specific defects. The Tribunal found this approach impermissible under the law and deleted the ad hoc disallowance.

Conclusion:
The appeals were decided as follows:
- ITA Nos. 2443, 2445, and 2446/Mum./2004 were allowed.
- ITA No. 2444/Mum./2004 was partly allowed.